Monday, April 25, 2005 | 9:45 a.m.
MEXICO CITY -- Mexico's attempt to get workers to invest their retirement savings in the stock market is being threatened by its own success.
It's been three months since regulatory changes allowed millions of Mexicans to pour part of nearly $45 billion in pension assets into the country's surging stock market. Yet few have, although the Bolsa Mexicana de Valores was the world's strongest major stock market last year and continued to set record highs through early March.
Pension fund managers initially sat out a market they felt has become overpriced because of speculation that their money would spur a rally. Since the rally ended in March, many have sat out the downturn, waiting for stability.
Pedro Zorrilla, the Mexican market's adjunct general director, called pension fund investments so far an important flow of capital into the market. But he added, "one also would have supposed the investment would be even higher."
Mexico's pensions are mainly held in individual retirement accounts called AFOREs, an acronym for Administradores de Fondos para el Retiro, or Retirement Fund Administrators. The accounts are funded by employee contributions matched by employers. They control close to $45 billion in assets, managed by banks and insurance companies as well as one large government pension operator.
In years past, fund managers could invest mainly in government bonds. But starting Jan. 17, managers were allowed to funnel up to 15 percent of workers' pension portfolios into stock markets here and in the United States, Europe and Asia. Pensions became automatically eligible for equities unless an investor is elderly or tells a fund manager he or she wasn't interested.
Only six AFOREs managers tested local equities early on, diverting about $200 million in the Mexican market in the first two weeks.
"The market was up 6 or 7 percent in the first few weeks after the arrival of the AFOREs," said Carlos Peyrelongue, head of market research for Merrill Lynch & Co. Inc. in Mexico City. "The AFOREs weren't the only thing driving the market, but the effect was positive."
But Francisco Rivero, head of research for Santander Investments in Mexico City, said investors "were way too optimistic that AFOREs were able to buy equities for the first time."
Part of the problem was that traders preparing for a market flush with pension-fund capital bought up shares late last year, pushing the Bolsa Mexicana so high that many AFOREs managers choose to stay on the sidelines in early 2005.
"The investments generated by AFOREs were largely neutralized by other buying," Rivero said.
To date, AFOREs have snapped up about $350 million in Mexican stocks -- but now it's the opposite problem that has kept them from buying more.
After rising 47 percent last year, from 8,795 points to 12,918, the Bolsa Mexicana has fallen every week since closing at a record-high 13,877 points on March 7. A 12 percent decline was triggered largely by rising U.S. interest rates and sharp dips in other Latin American exchanges.
"A lot of managers are waiting for a better time to start AFOREs in the market," said Jesus Viveros, an analyst at Mexico City consulting firm Bursametrica.
Another reason AFOREs have yet to go to Mexican shares is they are designed for long-term investments, which limits how much capital can be moved into new investments and how fast those changes can take place.
The AFOREs plan is theoretically similar to President Bush's proposed Social Security savings accounts that would give younger American workers the chance to invest some of the money they pay into the system. But the decisions about how Mexican pension capital is invested lie with fund managers -- workers themselves have little contact with their retirement funds.
Nathaniel Karp, an analyst for Mexico's BBVA Bancomer, said Mexican workers with pensions couldn't really be called investors.
"Everything is in the hands of the fund managers," Karp said. "The workers can simply say, 'Yes, buy equities' because the law changed. (But) they have no control over whether the money goes to Hong Kong, Japan or Microsoft shares."
Most observers expect AFOREs to invest between $1 billion and $1.5 billion in the Mexican stock market this year. That's a small amount since, according to the country's pension regulator, 89 percent of AFOREs' $45 billion in assets now have access to stocks.
But how much cash AFOREs generate early on may not be as important as their role in creating a new culture of long-term Mexican investors, who should bring with them a calming effect on the stock market, analysts said.
"These aren't day traders, they are investors who are going to have funds (in the market) for a long time," said Carlos Ponce, equity analyst with Ixe Financial Group. "Long-term, stable investment, that didn't exist in Mexico."
Millions of Mexicans live in poverty and millions more have jobs outside the formal economy, making investing impossible. Decades that saw Mexican banks nationalized, partly re-privatized, then bailed out of bankruptcy have left many potential investors suspicious of even a savings account. That mindset limits them to investments through cash-dominated, informal channels, such as buying real estate.
Investing in the stock market is a bigger challenge because of high minimum-balance requirements for mutual funds and other diversified-equities portfolios, as well as complicated and often-expensive rules about buying individual stock.
Only about 160,000 Mexicans are direct equities investors, while another 900,000 have non-pension portfolios that include stocks, according to the Bolsa Mexicana. But both tallies combined equal less than 1 percent of the country's 105 million inhabitants.
Government figures on the number of people with pensions are not reliable, but the new rules guaranteed that millions of Mexicans were granted indirect access to equities investments.
"The capital from the AFOREs will keep coming gradually and it will stay there even if the market falls," said Esteban Rojas of Mexico City's Arca brokerage. "In the long-term, it should make the market stronger."
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